ValBrickates Kennedy

Late Wednesday, Bristol
BMY, -0.41%
announced that INX-189, also known as BMS-094, had exhibited “a serious safety issue” during a Phase II clinical trial, prompting the drug maker to suspend the study until further notice. Analysts said they believe the safety issue related to a patient developing heart failure while taking a very high dose of the drug.

INX-189 was acquired by Bristol through its $2.5 billion takeover of Inhibitix earlier this year in an effort to expand its footprint in the potentially lucrative market for hepatitis C, or HCV.

Adding insult to injury on Thursday was the fact that a key reason Bristol paid a 160% premium for Inhibitex was to gain access to INX-189, which belongs to a promising new class of HCV drugs known as nucleotides. Shares of Bristol-Myers closed down nearly 9% at $32.55 Thursday afternoon.

News that INX-189 had run aground stoked trading in shares of Gilead Sciences
GILD, +0.18%
which is developing a rival nucleotide known as GS-7977, currently in Phase III testing. Last year Gilead paid $11 billion for GS-7977’s developer, Pharmasset, to expand its HCV pipeline.

Shares of Gilead closed up 7% at $57.29.

In addition to being nucleotides, INX-189 and GS-7977 are also orally administered, adding to their attraction. Until recently, most HCV patients were treated with drugs that were either injected or administered by IV.

“Of all the nucleotides in play, BMS-094 had represented the most formidable threat to Gilead’s dominance within HCV,” Barclays analyst Anthony Butler wrote in a note.

“Although Vertex’s ALS-2200 has shown similar potency to GS-7977, Vertex remains at least two years behind (potential launch in 2017), leaving Gilead ample time to flex their muscle. In addition, given the amount of data we have seen thus far with GS-7977, we remain confident there should be no major negative safety surprises,” Butler said, upgrading Gilead to overweight, with a price target of $65 a share.

Wells Fargo analyst Brian Abrahams said that HCV drug developers Vertex and Achillion would also benefit if INX-189 flopped

“We see positive read-throughs as well to Vertex, who just reported positive proof-of-concept data from nucleotide ALS-2200, as a failure of 189 would increase the scarcity value of the nucleotide class,” he wrote.

“We see positive implications for Achillion, both through the setback to a competitor as well as the possibility that if 189 is ultimately discontinued, Bristol-Myers could seek other HCV assets to codevelop with their remaining agents such as those in Achillion’s portfolio,” Abrahams added.

Shares of Vertex closed up about 1% on Thursday, while Achillion shares rose 2%.

Meanwhile, shares of Idenix Pharmaceuticals
IDIX
which is developing its own nucleotide drug, IDX184, were down 3%. The company priced its stock offering early Thursday at $8 a share, a 3.8% discount from Wednesday closing price.

But even if INX-189 is scrapped, Bristol may not be in a position to blow billions more on another HCV drug company. “Bristol-Myers may still attempt to form alliances with external companies (e.g., Vertex, Idenix, etc.), but its once-enviable place as a close second-place competitor in the HCV race cannot be easily recovered in our view,” according to Butler.

“Bristol-Myers likely needs to perform another acquisition, though with its recent spend on Amylin
AMLN
and Inhibitex, its financial flexibility may have been reduced,” the Barclays analyst said, downgrading Bristol to equal weight, with a price target of $33 a share.

Bernstein analyst Geoff Porges, meanwhile, thinks that if INX-189 turns out to be a dud, Bristol could pursue a collaboration with another HCV drug developer, including Gilead, “despite the disinterest Gilead has shown in such negotiations,” he wrote in his note.

“Other than Bristol, large players in the hepatitis field without nucleotides (Merck
MRK, -0.64%
Johnson & Johnson
JNJ, -0.18%
) are likely to increase their interest in other drug classes, as well as energizing their discussions with remaining nucleotide players,” he said.

Porges maintained his market-perform rating on Gilead, with a price target of $63 a share, and an outperform rating on Vertex, with a price target of $77.

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